New deal possible for troubled firms

Press, 3 September 1981, Page 3

New deal possible for troubled firms

PA Wellington The Minister of Justice (Mr McLay) hopes a half-way house can be found that allows companies to trade themselves out of financial trouble. Mr McLay said yesterday that he wanted to see a moratorium for companies with some hope of recovery. That would mean they would be supervised, reorganised, and rehabilitated in a manner “most beneficial to members. creditors and employees.” He told the Financial Executives' Institute that there had been growing criticism of receiverships, particularly by unsecured creditors of insolvent or near-insolvent concerns.

"The main criticism is that receivers are usually put in by banks or financial institutions which have a unique opportunity to obtain knowledge of a company's affairs.

"It has been alleged that when they decide that a company is in difficulties they can appoint a receiver to enforce their security by selling off the easily realisable assets, leaving little for unsecured creditors and certainly preventing the company from trading out of its difficulties." Mr McLay said that in many cases today the problem might not so much be one of insolvency in the long term as lack of liquidity. “Unfortunately, the effect of a receivership is often to precipitate a liquidation which ensures that the value of the business and assets suffer a rapid decline unless they are sold off quickly."

He said there had been many successful receiverships, that receivers did what they had to under the law and "generally behaved with a sense of responsibility.

However, it has been

argued that there is a need for the law to reflect a middle course between the extremes of allowing an insolvent company to trade on, or liquidating it in a hurry." Mr McLay suggested three questions which he said should be asked in relation to corporate insolvency law and the law relating to receiverships: © Should default in payment of charges on capital be the occasion of receivership or liquidation, or simply the occasion for an inquiry into the management and organisation of the operation? © Do corporate insolvency laws and procedures perform the most rational economic functions in the most economic way in the light of present-day conditions? O If not, can they be modified consistent with the principles of a free, open, and competitive market place?